Whether it’s an app that analyzes your sleeping habits, or a new rendering engine for a mobile game, entrepreneurs are at the forefront of innovation, yet many aren’t capitalizing on their own advancements or their work in the field of digital media.

Take, for example, the Scientific Research and Experimental Development program (SR&ED) and the Ontario Interactive Digital Media Tax Credit (OIDMTC, two highly lucrative, and surprisingly underutilized tax credits.

SR&ED As Canada’s largest tax incentive plan, with about $5-billion allocated by the federal and provincial governments, this tax credit was introduced to encourage Canadian businesses to invest in experimentation and technological advancement. Tax breaks are given to companies that invest in innovation resulting in new or improved products or processes.

For example, if you’re a mobile game developer, and you’ve invested in the development of a cross-platform game engine to replace the current software framework, which is only compatible with iOS architecture, qualifying expenses for that project could be eligible.

Claims can reach $3-million with your qualified expenditures being refundable as cash. Putting things into perspective, you could recover 68¢ of every $1 in wages spent on qualified SR&ED activities, or if you’ve spent $200,000 in qualified wages, you could recuperate $136,000 to offset against taxes payable. Along with wages, other eligible expenses include materials, equipment and machinery and subcontractors, with the claim having to be filed within 18 months of the fiscal year-end in which the project was completed.

A claim can only be filed on eligible SR&ED expenditures made in Canada that meet three distinctive criteria: a scientific or technological advancement; there must be uncertainty regarding success of the advancement; and there must be evidence of qualified personnel with relevant work experience involved in the project.

Related

OIDMTC Arguably one of the more generous tax credits, it is an Ontario refundable tax credit based on an organization’s labour, marketing and distribution expenditures. Intended to stimulate growth in Ontario’s digital media sector, corporations can claim 100% of the eligible labour, 50% to 100% of eligible third-party labour, and up to $100,000 in marketing and distribution. Although the company’s size is irrelevant, the product being developed must be designed to educate, inform or entertain, and must do so using two of the following categories: text, sound, and imagery. Acceptable products include computer and video games, mobile apps, interactive websites, Blu-Rays, and kiosks.

The OIDMTC credit is driven by content rather than innovation. Using the example from earlier, if the mobile game developer uses its newly designed cross-platform engine to build interactive gaming software, the expenses associated with developing, marketing and distributing that software could be eligible for the credit.

Though each province has its own digital credit and accompanying restrictions, in the case of OIDMTC, at least 90% of the eligible product must have been developed within companies filing Ontario tax returns, with employees or contractors working within the province. The product also cannot be self-promotional in nature, meaning if you were to produce branded interactive content that advertises your services in any way, that content would not be eligible.

If you meet the requirements for both SR&ED and OIDMTC — and given the surge of tech-based startups in the past few years, many entrepreneurs do — then it’s entirely possible to apply for both credits. However, be wary of double dipping. Applicants of both credits can’t claim an expense twice; therefore, you need to ensure each claim is clearly separated.

Despite the millions of dollars at stake, which in turn, could be reinvested into new projects, businesses either aren’t aware of the credit’s existence, or they believe in any number of myths surrounding the application process. In the case of SR&ED, businesses often assume the team has to don lab coats and have a scientific breakthrough to be eligible, or that the project needs to be successful. So long as the knowledge has been advanced in some shape or form, the claim still stands. Similarly, many businesses fear the application process for both credits is onerous, or that applying will result in an audit from the Canada Revenue Agency, two myths that are grossly inaccurate.

For either credit, there is some upfront work that should be considered to optimize eligible costs. The idea of a time tracker or daily activity log might sound daunting, but its presence can greatly boost the claim’s success rate. Use employee and subcontractor agreements where possible and always ensure the invoices and receipts you receive clearly define the work in detail.

When in doubt, document it. A little preparation can go a long way toward reaping the benefits of these programs.

Howard Lerner is a partner at the strategic accounting, business consulting and financial advisory firm Richter in Toronto. A qualified CA in England and Canada, he has more than 30 years in the industry, specializing in identifying eligibility and claiming special tax credits. He can be reached at hlerner@richter.ca

Shawn Rosenzweig is Richter’s resident expert on SR&ED tax credits, having obtained cash and tax credits totalling more than $3-million for his clients in the past year alone. He is also a partner at Richter’s Toronto office. He can be reached at srosenzweig@richter.ca

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